Operational-Turnaround-LBS-2012 (1)

1、Igor Zax, CFA, Sloan Fellow (LBS)Managing Director- Tenzor Ltd Tenzor Ltd 2009-2012 www.tenzor.co.uk1lBuying “Cheap”Typically driven by distressed sellerTiming is criticalLimited due diligencelNavigating Insolvency processLoan to earnPre-PacksWinning capital structure battlesHeavy reliance on legal

2、process Tenzor Ltd 2009-2012 www.tenzor.co.uk2lEfficient LiquidationSum of parts is more than the wholeIndividual assets are valuable but buyers are not interested in the whole“Bodies in the cupboard”lOperational ImprovementsManagement ChangeIntegration/SynergySpecialist Turnaround Strategies Tenzor

3、 Ltd 2009-2012 www.tenzor.co.uk3lInsolvency may be an efficient solution if there are substantial assets in the business (based on actual liquidation value) and they can be easily secured. lOtherwise, one needs to keep the company as going concern as the best way to recover- and this is not only len

4、ders decision.lTo do so, one needs to answer why the company exists and how is it linked to its environment.lBank lender makes a one-off decision to lend-supply chain partners making their decisions (including granting credit) every time Tenzor Ltd 2009-2010 www.tenzor.co.uk4lControlCreditors seek t

5、o control assets and decision makinglCapabilityThe team (existent, new or interim) need to be capable for the tasklCredibilityTurnaround plan and the team need to have credibility with all stakeholders lClarityWhat is the companys core business, how it fits with the industry structure and does the b

6、usiness model match itlCo-operationLending group are not the only stakeholders. Ongoing support from suppliers, customers, distributors and others are vital for survival Tenzor Ltd 2009-2012 www.tenzor.co.uk5lDiagnostic “post deal” due diligencelFixing the teamLoyaltyCompetenceCommunicationlRe-defin

7、ing the businesslProcess optimisation Tenzor Ltd 2009-2010 www.tenzor.co.uk6 Tenzor Ltd 2009-2012 www.tenzor.co.uk7AccountingLegalTargetODD-Multi Dimensional PictureJust one side?We need not only answer “what” but “why” and “what does this mean?” lRe-construct the link between the numbers and physic

8、al processGet the access outside of “professional seller”!Do not limit your conversation to finance people- they talk about numbers, not the businessSpeak to sales, procurement, manufacturing- and reconcile what you hear to what you see in the numbersUnderstand external environment- suppliers, custo

9、mers, distributors- they may tell you a lot of things you would not hear from the company Visit the warehouse and manufacturing and ask few simple questions Tenzor Ltd 2009-2011 www.tenzor.co.uk8 Tenzor Ltd 2009-2012 www.tenzor.co.uk9lWhat Do you see in Warehouse?Two similar boards (one of which is

10、PCB and one is assembled) are on the warehouse shelf lWhat do you see in Accounts?Working Capital problemslWhat do you see in Manufacturing:Delays, quality issueslWhat do you see in Customer ServiceQuality IssuesPCBPCBAlThe company is buying printed circuit board from a small supplier with advance p

11、aymentlThey have no way to properly do QC before assemblylThey send the board for assembly to another far away providerlWhen they finally got the board back, they find not all of them pass testing. Complex process to find out whose fault (from the two suppliers) it is. lWhat we discovered WRONG SUPP

12、LY CHAIN causing the problem Tenzor Ltd 2009-2012 www.tenzor.co.uk10lGlobal industry structures changed massivelyl Platform companies Produces nowhere but sells everywhere. know where the clients are and what they want and where the producers are. Platform companies then simply organise the ordering

13、 by the clients and the delivery by the producers (and the placing of their logo on the product just before delivery).“- GaveKallIntegrated and collaborative supply chains.lContract manufacturing, outsourcing, muli-tier distributionlChanged structures are often ignored by analysts Tenzor Ltd 2009-20

14、12 www.tenzor.co.uk11 Tenzor Ltd 2009-2010 www.tenzor.co.ukComponent ManufacturersContract ManufacturersComponent DistributorsOEMDistributorsVARsCustomers! Understanding the supply chain is core to determining the future of the company. How is wealth and risk distributed? What is outsourced to whom?

15、 Who does financing- is the company a bank? Should it be? Is the issue overall health of the chain, distribution of rewards and risks at particular layer or just company specific issues? Who can “shortcut” the chain and what would be consequences? Who is going to loose the most if company disappear

16、and what can they contribute to rescue?12lMost of the problems of companies manifest themselves in working capital (A/R, Inventories, A/P)lAged debtor list and its analyses vs. salesAre receivables real?Is ageing real ?Why payments are late disputes vs. credit?Are sales real?What happened prior to s

17、ale?lSale is converting inventory to A/R showing a profit. Did it Push the problem next level?Chanel overstocking?Produce uncollectable A/RIs there actual end user demand? Tenzor Ltd 2009-2012 www.tenzor.co.uk13lAnalysing late payments allows to uncover issues with quality, logistics, systems, etc.

18、credit management is the best source of information about the company issueslA/PShort terms why terms are not offered?lMay be wrong supplier, no insurance cover, bad history?Long terms are these sustainable?Overdues- would these be tolerated?Key question are suppliers still supplying or they already

19、 or about to stop?May be significant cash outflow post acquisition. Tenzor Ltd 2009-2011 www.tenzor.co.uk14lInventoryClear distinction between finished goods, components and work in progressObsolescenceComponents for wrong models? They may be perfectly good but perfectly uselessIs there a process fo

20、r managing inventories?lOverreliance on ratios- these are just averages“Good” DSO may be a mixture of prepayments and massive overdue “Good” DIO may be a large pile of useless stuff and a massive shortage of needed inventories“Good” DPO may be a mixture of pre-paid suppliers and the ones who already

21、 stop supply and looking for legal action Tenzor Ltd 2009-2012 www.tenzor.co.uk15lEBITDA focus creates a strong incentive to under investlCompany can run on close to zero CAPEX and even maintenance for a while but this would mean massive cost in the futurelCutting R&D improves short term profita

22、bility but negatively affects future cash flows.lCutting people improves profitability but in many business this is the main asset.lParticularly relevant for industry buyers- often overestimating own ability to develop/support Tenzor Ltd 2009-2011 www.tenzor.co.uk16lAssets are not enough there shoul

23、d be a process for business to runlIf one thinks of outsourcing (either manufacturing or service) one needs to have a n efficient process in the first placelEfficient and well documented process can be “portable”- i.e. Moved to different location etc. If the “process” is based on a “fire fighting” s

24、kills it is not only inefficient, but not “portable”lOne needs to understand what they are buying “whole business” or its part (for example sales team or R&D capability)lIf part of the business is not needed, what would it cost to liquidate and would this adversely affect the “desired” part. Ten

25、zor Ltd 2009-2012 www.tenzor.co.uk17lLoosing supplier credit is the major risk-do not provoke by late payment (but try to negotiate longer terms) and keep good communication. No suppliers support-no deal.lReceivables are major asset- they need to be managed properly and financed were appropriate. Bo

26、th quality and financibility of receivable book may be key in pre-deal due-diligence.l Manage inventories-but understand that many optimisation models assume risk free counterparties.lAnalyse the product mix not only from profitability standpoint, but also working capital effect and go out of produc

27、ts you can not affordlIf the company is not right place for financing and risk, find one in the supply chain who can take it Tenzor Ltd 2009-2010 www.tenzor.co.uk18SupplierDistributorpurchaseSellPaymentProvides:Marketing/SalesLogisticsServiceWorking Capital Finance?Risk mitigation?Risks:Distributor

28、credit riskThis risk may be highly concentratedCustomer credit risk (if distributor has little capital)Product liability (any case)Credit Insurance?Factoring?Securitisation?What credit limit?Diversified risk?Low concentrations?Single vs. multi tier?How do you finance receivables in EM? Tenzor Ltd 20

29、09-2012 www.tenzor.co.uk19SupplierDistributor-now agent?SellProvides:Marketing/SalesLogisticsServiceCollections?Performance risk mitigation?Credit Insurance-easier to obtain?Invoice discounting?Factoring?We are in Europe!Diversified risk?Low concentrations?Single vs. multi tier?No need to finance in

30、 EM? Low working capital needs! Tenzor Ltd 2009-2010 www.tenzor.co.uk20lWorking Capital needs are related to structure, not necessarily value addedlSuppliers upmost concern now is risklLearn the core lesson from banking crisis- the fact that you transferred risk on paper DOES NOT mean you transferre

31、d it if counterparty is or becomes weeklVariety of legal structures to mitigate risk, while reduce working capital needslSimilar models can be applied to contract manufacturing, printing, material processing, etc. Tenzor Ltd 2009-2012 www.tenzor.co.uk21 Tenzor Ltd 2009-2012 www.tenzor.co.uk22Compone

32、nt SupplierAssemblerOEM What business the assembler is in?What worries the component supplier?What worries the OEM?What worries banks/factoring company/credit insurer?Would acquisition resolve any of these? Is there alternative model?Whom do you need to speak about what?When would the “original” str

33、ucture work best?lCash flow lending was the main trend in the past. Today, EBITDA is much more volatile- not only reducing multiples, but also making cash flow lending unavailable in many areas.lLending against assets becoming more used, especially where the value can be clearly determined.lIlliquid

34、 and long term assets are difficult to lend against-shorter term is easier.l“New Financial Engineering”- how to reduce the risk in transactionslUnlike cash flow lending, ABL often needs understanding of operations Tenzor Ltd 2009-2012 www.tenzor.co.uk23lIn Europe, credit insurance is extremely impor

35、tant (domestic and export)lThe supplier may not be the one making decisionslIf cover is withdrawn, company can try to negotiate with insurer (to restore cover) and/or supplier (to continue sell uninsured) IF debt is currentlIf the payments are overdue, supplier may not supply or risk the claim not b

36、eing paid.lReceivable financing is underutilised by suppliers-they paid for taking off the risk but did not use the financing available!Trade Receivables % Insured % Financed Europe 355UK306US 54 Tenzor Ltd 2009-2012 www.tenzor.co.uk24lThe supplier (even a highly distressed) is a lender, providing n

37、ext step in the chain (distributor, manufacturer, end user etc.) with credit through payment terms (sometimes they are the only or main source of credit).lBuyer of the goods can effectively provide money to the seller through reduced payment terms without taking risk (providing supplier fulfilled th

38、e contract).lThis may provide a workable alternative to DIP (Debtor in Possession) financing, allowing in some cases to provide funds to distressed company without being affected by possible bankruptcy procedures Tenzor Ltd 2009-2012 www.tenzor.co.uk25lSetting up oversees distribution entities is cu

39、rrently seen mainly from tax planning perspectivelSetting an oversees distribution/operation entity (with transparent operations and reasonable capitalisation) may create significant financing opportunity as:The company will have access to efficient receivable financingThe company will effectively l

40、end to the EM one through short payment terms without joining queue of creditors Tenzor Ltd 2009-2012 www.tenzor.co.uk26lEM Company (high margin/low liquidity) buying a low margin/high volume distributorLower price-higher margin at distributor levelDistributor has access to WC finance-some times eve

41、n for sales back to EMShort payment terms- resolving liquidity issuelBuying distressed EM exporting CompanyVery difficult to refinance locallyInvest at distributor level-refinance through payment terms Tenzor Ltd 2009-2012 www.tenzor.co.uk27lRecent years show a global trend to “platformisation” lThi

42、s was driven by lower transaction costs, supply chain coordination and general low risk environmentlThis is changing now, as risk is again high on the agenda, and transaction costs are uplDeals start coming small and very large lCost of acquiring supply chain partner may be lower than switching cost

43、l Resolving of concentration problem- getting away from excessive dependencies.lA lot of supply chain optimisation techniques designed for a “risk free” worldlIn a risky world it is cheaper to have a solution within a firm- the very reason firms exist (Richard Coase, Nobel price in economics 1991) Tenzor Ltd 2009-2012 www.tenzor.co.uk28lCompanys working capital needs depends from busi